The Competitiveness of Nations
in a Global Knowledge-Based Economy
March 2003
Harry
Hillman Chartrand
The Labour
Theory of Knowledge & Its Corollary:
The Knowledge Theory of Capital
Dedicated to
Richard Vanderberg & JSTOR
The
Labour Legacy of Adam Smith
The
Hardware Question
The
Software Question
Knowledge
Faculties
Reason
Revelation
Sentiment
Sensation
Quintessence
The
Labour Theory of Knowledge & Its Corollary
Domains
Natural
& Engineering Sciences
Humanities
& Social Sciences
The
Arts
Property
Evolution
Matrix
Why
are ideas not protected?
What
constitutes a matrix?
What
constitutes perception of a matrix?
What
is the function of a matrix?
Utilitarian
Non-Utilitarian
Persons
Forms
Designs
& Patents
Copyrights
& Trademarks
Know-How
& Trade Secrets
Markets
Tacit
Knowledge
Codified
Knowledge
Tooled
Knowledge & the Knowledge Theory of Capital
Figure
1: The Labour Theory of Knowledge
References
Economics, as part of the Humanities & Social Sciences (HSS), is not just about mathematical precision; it is also about retracing the voyages made by economists over some four centuries of discovery. In many cases captains and crews never returned to be marooned forever in intellectual cul de sac. Sometimes, however, their voyages can be retraced and the discoveries of these early explorers, from time to time, added to mainstream thought: witness the ‘New’ Classical Economics, the ‘New’ Institutionalism and revivification of Schumpeterian ‘creative destruction‘(1950). And sometimes, the ancient voyages of even those who succeeded in returning and reshaping the mainland of economic thought may profitably be retraced and their findings reinterpreted.
In this paper I will do just that for Adam Smith’s labour theory of value. I will first sketch an overview of labour during the life and times of Adam Smith. I will then reconsider his views about the division and specialization of labour, laissez passer and his labour theory of value itself. My historical observations are drawn primarily from the works of J.R. Commons (1924), W.B. Houghton (1941, Jan. & Apr. 1942, 1952); Emma Rothschild (2001), W.J. Samuel (1961; 1962), J.A. Schumpeter (1954), H.F. Thompson (1965) and Edgar Zilsel (1940a, 1940b, 1941, 1942, 1945).
Based on this reinterpretation I will propose an economic epistemology, i.e., a theory of knowledge, one intended to be consonant with Smith and with the findings of analytic psychology (Hillman 1980, 1981; Jung 1953-1979; Neumann 1954; Sharp 1991). I will then apply this epistemology to generate a taxonomic foundation for a labour theory of knowledge. Taxons will include:
· three dominant contemporary and institutionalized knowledge domains – the Natural & Engineering Sciences (NES), the Humanities & Social Sciences (HSS), and the Arts;
· three generic categories of intellectual property rights (IPRs) that temporarily convert knowledge into property that may be bought and sold in markets – designs & patents, copyrights & trademarks, and know-how & trade secrets – before entering the public domain forever;
· three material forms in which knowledge must be fixed for IPRs to exist – utilitarian and non-utilitarian matrices as well as the person – natural and legal; and,
· three types of knowledge markets – the markets for tacit, codified and tooled knowledge.
I will argue the strong and weak interactions of component parts of the taxonomy (Figure 1: vertical vs. horizontal) to illustrate its descriptive meaningfulness and explanatory power. I apologize before hand for some repetition and use of terms not currently part of the economic lexicon. These include: circular causality derived from neurophysiology, primary and secondary master/slave configurations derived from computer science; and, my neologism, tooled knowledge. I also revivify terms once familiar to the economic trade of Smith’s day like Reason, Revelation, Sentiment and Sensation. Furthermore, unless otherwise specified, general definitions and etymology (origin of words) are derived from the Merriam Webster Dictionary On-Line.
It is not my intention to revivify the labour theory of value nor displace the Neo-Classical solution but rather to compliment them. I intend to retool the theory as a labour theory of knowledge and expose its corollary – the knowledge theory of capital. Thereby I hope to make a contribution towards resolving the contemporary incommensurability of knowledge (Kuhn 1996). This is the shadow side of division and specialization of labour in a knowledge-based economy; a wraith that Adam Smith, as we will see, foresaw. The dark side of “good paradigms make good neighbours” (Fuller 2000; 7) is evident in the near apocalyptic twentieth century clash between Marxism and Markets – both paradigms of economic thought with the labour theory of value as the theoretical bone of contention.
The Labour Legacy of Adam Smith
Adam Smith (1723-1790) can justly be called ‘the great mariner’. It was he who first navigated the limits of economics using what was, in his day, a branch of moral philosophy destined to become the first ‘social’ science - political economy. Economics, as a discipline of thought or “a recognized field of tooled knowledge” (Schumpeter 1954: 143) is generally dated from the 1776 publication of Smith’s The Wealth of Nations. The foundation for Smith’s concept of knowledge, however, was laid down in his other great work, The Theory of Moral Sentiments, published in 1759.
With time, some of Smith’s findings have become axiomatic in economics; others, have slipped into its murky depths waiting to be recovered by some adventurous intellectual archaeologist. What fell, or was thrown, into the waters partially reflects the reactionary forces dominating political life after Smith’s death until the fall of empires in 1918. During his own life, he was considered, by many, a dissident, a friend of French économistes, a Jacobin, a revolutionary.
Quoting Rothschild about the pre-revolutionary reception of The Wealth of Nations:
… some weeks before it was first published in London in March 1776. “Here is a strange adventure,” the abbé Morellet wrote to Turgot on February 26; he relates that as he was waiting, earlier in the day, for the proofs of his translation of “the piece by Mr. Smith” - a section of the early chapter of the Wealth of Nations dealing with corporations and apprenticeships - he received news that the manuscript had instead been seized by the police, and was deemed to be worthy of burning. (Rothschild 2001, 87)
Smith wrote just as the republican revolution in America (1776) was overthrowing a feudal order of subordination - an order in which some were created superior and others inferior by birth. The Declaration of Independence (1776) overthrew this old order with its premise: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
Smith also lived to see the second republican revolution in France overturn its Ancien Regime of privilege replacing it with one of ‘liberty, equality and fraternity’. He did not, however, unlike Bentham, live long enough to see both betrayed – in the first, by limiting the definition of ‘men’, and in the second, by self-righteous revolutionary zeal excusing terror as an instrument of freedom.
Nonetheless, the view of the individual as the foundation stone of political life was shared by Smith and was consonant with his view of the individual as the foundation of economic life. In his day, there was in fact only one life. Politics and economics were, according to Smith, incestuously entwined - political power converted to economic profit and profit to power. The regime of privilege in the form of feudal ‘corporations’ including the Church, mastership guilds, towns and trading corporations was a fundamental impediment to the wealth of nations because it inhibited the individual in pursuing one’s self-interest rather than that of a lord, lady or other superior.
Following the defeat of the French Revolution, the Congress of Vienna in 1815 created what was known as the ‘Holy Alliance’ of European monarchies to reinstate political and social subordination and repress republican sentiment among the population. In Britain (and America), however, Adam Smith’s successors successfully argued for business enterprise to be set free from the remaining regulatory vestiges of the pre-revolutionary order. In effect, economic life was to be divorced from political life. Political power was no longer to be converted into private profit, nor was private profit to be the source of political power – in theory.
In fact, the process had begun in England with the 1624 passage of the Statute of Monopolies to abolish the power of the guilds. A guild was, of course, a centre of specialized knowledge called a ‘trade’ or ‘mystery’ (Houghton 1941). The Statute of Monopolies was the first step in a long evolutionary process whereby Common Law courts progressively stripped the guilds, with one notable exception – the printer’s - of monopoly power and assumed responsibility for their regulation.
To quote J.R. Commons about the development of business law in the Anglo-American Common Law tradition from the time of the Statute of Monopolies:
The next hundred years, until the Act of Settlement in 1700, was substantially the struggle of farmers and business men to become members of the Commonwealth, whereby they might have courts of law willing and able to convert their customary bargains into a common law of property and liberty. The court which abolished the power of the gilds began to take over the work of the gilds. Their private jurisdiction became a public jurisdiction. And the very customs which the gilds endeavored to enforce within their ranks became the customs which the courts enforced for the nation. The monopoly, the closed shop, and the private jurisdiction were gone, but the economics and ethics remained. Much later, in the modern commonwealth, other functions of the gilds, such as protection of the quality of the product and the qualifications of practitioners, have also been taken over by courts or legislatures. (Commons 1924: 230)
One economic axiom derived from Smith is that ‘the division and specialization of labour is limited by the extent of the market’. Both imply knowledge. In the first instance, ‘know-how’ is required in the division of the production process and, in the second, specialized skills are required to efficiently realize an ever increasingly complex production process. Division and specialization of labour are one of the cornerstones of the Wealth of Nations.
To Smith, however, gains had to be carefully counted against costs including what Marx would later call ‘alienation from the means of production’. For Smith, the answer was public education. The dialogue of the marketplace as well as of the political arena required the ability to read, write and account on the part of all citizens. Quoting Rothschild:
Smith is insistent, from the beginning of the Wealth of Nations, on the equality of natural talents. The difference between the philosopher and the common street porter, he says, “seems to arise not so much from nature, as from habit, custom and education. When they came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike.” Their “very different genius,” as adults, is the consequence of the division of labor more than its cause. People are not born “stupid and ignorant” but are made so by their “ordinary employments”; by the simple, uniform nature of the work they can get; and by the circumstance that their parents, who “can scarce afford to maintain them even in infancy,” send them out to work as soon as they can. (Rothschild 2001, 87)
Moving from the division and specialization of labour to that of knowledge, the market has now extended to global proportions. And, as Smith implied, there has been a narrowing of breadth and an increasing of depth with the individual becoming increasingly atomized, alienated or simply disinterested in all but a narrowing horizontal range of the knowledge spectrum. This is evident in the Natural & Engineering Sciences (NES) where ‘normal science’ involves a puzzle-solving attention to a smaller and smaller field of vision (Kuhn 1996). This has led to the problem of incommensurability of knowledge compounded by the problem of ‘just keeping up’. It is also evident in the Arts where the Art-for-Art’s-Sake Movement, a child of the Industrial Revolution (Henderson 1984) has generated an ever moving, shifting and changing avant garde (Bell 1976) spinning out increasingly esoteric aesthetic messages intended for ever smaller audiences, e.g., for atonal music and labels larger than pictures as described in Tom Wolfe’s The Painted Word (Wolfe 1975).
Another economic axiom generally attributed to Smith is laissez faire – loosely translated as: let them do what they want, or more specifically, non-governmental intervention in the marketplace. While the sentiment is Smithian, the term itself originates with his French colleagues – the Physiocrats (Samuels 1961, 1962). A fuller statement is, to quote Samuels:
It is laissez faire, laissez passer, meaning thereby freedom to do, or freedom to make, and freedom to pass; or, as Marshall put it, “let people make whatever they like and move wherever they like.” (Samuels 1962, 157).
From before Elizabeth I and the Statute of Artificers of 1563, there had been severe periodic labour shortages in England caused by disease (including the plague) and the first English civil war – the War of the Roses - that placed the Tudors on the throne. In such unsettled times feudal control tended to breakdown and labour, especially skilled labour, tended to move where wages were highest. To maintain feudal control, the Statute of Artificers established a statutory apprenticeship system replacing the crumbling medieval one in which journey men increasingly left their masters for greener pastures. The Statute set maximum wage rates, established residency requirements, and was intended to instill a sentiment of subordination. It was against this system - and parallel statutory privileges granted to churches, trading companies, merchants, incorporated towns and cities - that Smith protested. In 1814, however, it was only government enforced restrictions on the movement of labour that were replaced when a ‘voluntary’ apprenticeship system was introduced (Rothschild 2001, 90).
In short order, the guild system collapsed and the labour market became flooded with unskilled workers. The successful innovation of the industrial factory system meant, however, that Britain quickly became the lowest cost producer of many goods, especially textiles. The top end of that market, however, continued to be dominated by mills in Lyons, France and Munich, Germany. By 1835 the quality of ‘high end’ British textile production had declined to the point that the British Board of Trade appointed a Select Committee to investigate the problem and recommend remedies. It called for the marriage of art and industry to enhance English competitiveness with European rivals. The result was creation of the first school of design in South Kensington in 1836. It is interesting to note that the curriculum of the new school was designed to insure that no craftsman would ever aspire to become an artist. Artists were gentlemen who attended the Royal Academy of Art (Savage 1985). This distinction between the crafts and the arts continues a much older schism in Western culture between the Mechanical and Liberal Arts, of which more below.
Later in the 19th century, however, after abrogation of subsequent Conspiracy Acts that made trade union membership a crime, the guilds returned in the guise of craft, industrial and trade unions. Like the original guilds, these organizations represented labourers possessing specialized knowledge and skill.
Before Adam Smith, the political economic concept of labour was defined by reference to a feudal system in which all grades and classes of labour and all other forms of property were, ultimately, subject to a Monarch while the soul of the labourer was entrusted to the tender care and mercies of a Church with a monopoly on revelation. The resulting ‘caste system’ also embraced a more ancient division of labour between the Liberal and Mechanical Arts. From the time of the ancient Greeks when slavery was first introduced through the Roman Empire into the Christian Middle Ages and up to the Renaissance, those who worked with their heads practiced the Liberal Arts; those who worked with their hands, the Mechanical. In essence, the first were considered ‘ennobling’; the second, ‘demeaning’. It is interesting to note that writing was considered a mechanical art in the ancient and medieval worlds. It was something a ‘gentle’ person did not do; it was for scribes (Fuller 2000, 46).
It took the 15th century artist/engineer/humanist/scientist genius of Da Vinci, Dürer, Michelangelo and their kin to begin bridging this ancient chasm. An additional span was laid by their successors in the 16th and 17th centuries – high artisans and instrument makers - whose ‘experimental method’ inspired Francis Bacon and fuelled the ‘Scientific Revolution’ (Zilsel 1945).
With Smith, and the republican ethos of the American and then the French Revolutions, the labourer (Liberal and Mechanical) became free of feudal ownership and religious intolerance. In economic theory or moral philosophy as it was then called, the value of goods and services was rooted by Smith, among others, in a ‘labour theory of value’. Smith’s theory quickly eclipsed older exchange, scarcity and use value theories. It was the time, effort and skill of labour (and wages – the higher the better according to Smith for the wealth of nations) that determined the ‘just price’ of a good or service in the marketplace.
Even Capital, as physical plant and equipment, was subsumed under the labour theory by Bohm-Baverk and the Austrian School. In essence, capital was historically embodied labour using ‘round-about’ methods of production (Blaug 1968, 510-11). How to measure labour content of a good as well as historically embodied labour in capital was not, however, convincingly answered (Dooley 2002).
The labour theory of value maintained theoretical dominance for nearly a century until the Marginalist Revolution of the 1870s and innovation of the Marshallian Scissors of supply and demand. Marshall rejected the labour theory in favour of what can be called a modified theory of exchange involving equilibrium between:
the constrained utility maximization of the consumer (subject to price and income constraints) measuring ‘willingness’ to buy, a.k.a., demand; and,
the constrained profit maximization of the entrepreneur (subject to cost and technical constraints) measuring ‘willingness’ to produce, a.k.a., supply.
The labour theory of value continued, however, as the foundation stone of Marxist economic thought and fueled the Communist Revolutions of the 20th century. To appreciate the importance of the theory, one may look at the ‘Cold War’ that geopolitically divided the planet into two armed camps threatening global ‘mutually assured destruction’, or MAD, for nearly half a century. One camp believed that capital, as private property, was the foundation stone upon which ‘hired’ labour - through its division and specialization – transformed natural resources (or ‘dumb nature’) into commodities of use and value to a ‘sovereign’ consuming public. The other believed that ‘sovereign’ labour was the only productive asset and ‘capital was theft’. On this dispute the life and death of human civilization, as well as the biosphere of the planet, lay beneath a nuclear sword of Damocles dangling on an elliptical trajectory with a fifteen minute warning.
The triumph of market price over Marx as a ‘theory of value’ – equating the ‘willingness’ of consumers to buy and producers to sell – occurred at a time, however, when the ancient distinction between the Liberal and Mechanical Arts resurfaced in a new strain – management versus labour. In effect, labour worked with its hands; management worked with its head.
While a satisfactory theory of capital never emerged from the Classical School of Adam Smith or the Neoclassical School, the idea of a single owner of capital directing production was, and remains, an elementary assumption of the economic theory of the firm. Growth and development of the limited liability corporation, however, spread capital ownership wider and wider (contra Marx) to embrace more and more ‘shareholder’ owners. This, in turn, led to a separation of ownership and control first formally noted by Berle & Means (1932) with the concomitant emergence of a new class of labour called ‘management’. This new class exercised the prerogatives of ownership as hired agents (employees) of shareholders. That the ‘agency problem’ in economics has not been solved is evident in the recent wave of corporate scandals, e.g., Anderson, Enron, Tycho, Worldcom, et al.
But why should one class of labour ‘work’ and another ‘manage’? This was the subject of Richard Bendix’s historically exhaustive Work and Authority in Industry: Ideologies of Management in the Course of Industrialization (1956; 1976; 2001). Bendix traces the conceptual history of modern management back to feudal times. He finds, in effect, a theory of positive thinking: managers have a positive self-image and can defer gratification while workers do not and cannot do the same. Bendix captures, perhaps, the last embers of the Classical ‘Iron Law of Wages’. Classical economics viewed, with relative equanimity, the starvation of the labourer who must then accept lower real wages and who, alternatively, with higher real wages simply bred increasing the labour supply thereby lowering real wages through competition. Full employment, under the Classical model, was assured on the backs of labour, or what Marx called “the surplus army of the unemployed”.
John Kenneth Galbraith in his New Industrial State (1967) went further and described the modern corporation as governed by a self-replicating technostructure of managers (produced by and selectively chosen from among graduates of so-called ‘B’ or business schools) who then direct ‘workers’ on behalf of an ever increasingly and diffuse pool of shareholder-owners. Galbraith also explored the relationship between large corporations and a newly emerging class of labour - creative talent, specifically artists (Economics & The Public Purpose, 1973). While the classless genius may have emerged with the Renaissance’s artist/engineer/humanist/scientist, by definition, it is exceptional and has not, historically, constituted a distinct class of labour.
By the late1960s, however, as a result of mass post-war, post-secondary education, an historically large demographic cohort of talent became available to both arts and science-based industries. By the 1980s and 1990s observers such as Robert Reich in The Work of Nations (1992) recognized that the displacement of manual workers by automation and computerization (together with increasing Third World ‘off-shore’ production) was creating a new class of American symbolic workers, i.e., those who manipulate words, numbers, visual and other recorded images and sounds. The most recent wave of talent include so-called ‘biotech stars’ responsible for the emergence of a whole new sector of the economy – biotechnology (Zucker et al, 1998).
The mainstream economic concept of labour holds one additional and inherent bias. Other traditional factors of production – capital, entrepreneurship and natural resources – can reasonably be assumed fixed in the short-run; labour is the variable factor to be adjusted to maximize profits. Calculation of the Newtonian equilibrium for constrained profit maximization, however, becomes problematic when the variable is volitional.
In his 1998 article “Beyond the Information Revolution”, Peter Drucker captures the dilemma of shareholders and management in dealing with the new knowledge worker. Bribes in the form of stock options will not suffice, Drucker concludes. The old schism between management and labour, between the Liberal and Mechanical Arts, between geeks and suits, according to Drucker, must be healed through respect based on mutual need:
Increasingly, performance in these new knowledge-based industries will come to depend on running the institution so as to attract, hold, and motivate knowledge workers. When this can no longer be done by satisfying knowledge workers’ greed, as we are now trying to do, it will have to be done by satisfying their values, and by giving them social recognition and social power. It will have to be done by turning them from subordinates into fellow executives, and from employees, however well paid, into partners. (Drucker 1998, 57)
The Competitiveness of Nations
in a Global Knowledge-Based Economy
March 2003